Crawford & Company - Q1 2024

Transcript

Operator (participant)

Yeah, technical interruption there. Good morning. My name's Colin, and I'll be your conference facilitator today. At this time, I would like to welcome everyone to the Crawford & Company First Quarter 2024 Earnings Release Conference call. In conjunction with this call, a supplementary financial presentation is available on our website at www.crawford.com. Under the Investor Relations section, all lines have been placed on mute to prevent any background noise. After the speaker's remarks, there'll be a question-and-answer period. Instructions will follow at that time. Should anyone need assistance at any time during this conference, please press star, then zero, and an operator will assist you. As a reminder, ladies and gentlemen, this conference is being recorded today, Tuesday, May 7th, 2024. Some of the matters to be discussed in this conference call and in the supplementary financial presentation may include forward-looking statements that involve risk and uncertainties.

Hello. Apologies again. There's just some technical issues.

Tami Stevenson (General Counsel)

Colin, I will read the forward-looking statement at this point. Thank you.

Operator (participant)

Okay. Apologies.

Tami Stevenson (General Counsel)

This is Tami Stevenson. Some of the matters to be discussed in this conference call and in the supplementary financial presentation may include forward-looking statements that involve risks and uncertainties. These statements may relate to, among other things, our expected future operating results and financial condition, our ability to grow our revenues and reduce our operating expenses, expectations regarding our anticipated contributions to our underfunded defined benefit pension plans, the collectibility of our billed and unbilled accounts receivable, financial results from our recently completed acquisitions, our continued compliance with financial and other covenants contained in our financing agreements, our long-term capital resource and liquidity requirements, and our ability to pay dividends in the future. The company's actual results achieved in future quarters could differ materially from the results that may be implied by such forward-looking statements.

The company undertakes no obligation to publicly release revisions to any forward-looking statements made in this conference call to reflect events or circumstances occurring after the date of the call or to reflect the occurrence of unanticipated events. In addition, you are reminded that operating results for any historical period are not necessarily indicative of results expected for any future period. For a complete discussion regarding factors which could affect the company's financial performance, please refer to the company's Form 10-Q for the quarter ended March 31, 2024, filed with the Securities and Exchange Commission, particularly the information under headings Risk Factors and Management's Discussion and Analysis of Financial Condition and Results of Operations, as well as subsequent company filings with the SEC. This presentation also includes certain non-GAAP financial measures as defined under the SEC rules.

As required, a reconciliation is provided for those measures to the most directly comparable GAAP measures. I would now like to introduce Mr. Rohit Verma, Chief Executive Officer of Crawford & Company. Rohit.

Rohit Verma (CEO)

Thank you, Tami. Good morning and welcome to our First Quarter 2024 Earnings call. Joining me today is Bruce Swain, our Chief Financial Officer, and Tami Stevenson, our General Counsel. After our prepared remarks, we will open the call for your questions. Before we begin today, I would like to take a moment to acknowledge the recent tornado activity and resulting damage in the Midwest. Our thoughts are with the many people who were impacted by devastating tornadoes this weekend, and we stand ready to support our industry partners as the areas affected begin the damage assessment and the buildback process. Our results for the first quarter of 2024 came in largely as expected. Benign weather continued to impact our consolidated revenue compared to last year, but our underlying non-weather-related business performed very well.

My comments today will focus on operational updates for the quarter, and Bruce will then take a deeper dive into our first quarter financial performance. As a reminder, Crawford is the largest publicly listed provider of claims management. We manage more than $18 billion in claims annually across 70 countries, employing approximately 10,000 talented individuals and thousands of field resources. Our scale and global presence set us apart from other providers and offer a competitive advantage in a fragmented market. As a result, we are valued as a partner of choice for top carriers and continue to be an industry leader. We are well-positioned to drive growth and strategic success. Although we may see quarter-to-quarter variation, several key factors support our long-term progress. First, the frequency and severity of extreme weather events is increasing.

While we have seen some benign weather pattern from the back half of 2023 through the beginning of this year, catastrophic weather remains a significant long-term growth driver for Crawford. As natural disasters become more prevalent, our expert catastrophe teams are utilized to provide increased resources and support for carriers and policyholders. While there will be quarter-to-quarter fluctuation, this is unquestionably a longer-term trend we are seeing. Second, we continue to see a long-term trend of carriers outsourcing claims as they contend with increased volumes, staffing challenges, and a lower velocity of technology adoption. Crawford's team of adjusters are experts in their fields, providing capacity, expertise, and scale to manage outsourced claims. Additionally, our claims handling technology helps reduce time and costs for carriers. Third, the fragmentation within the independent loss-adjusting market presents an opportunity for us to expand our market share, leveraging our robust brand recognition.

Our scale is a distinct competitive advantage as carriers turn to us for a breadth of offerings and the assurance of high-quality service. Fourth, as I have stated on previous calls, we have an incredible customer base, and continuing to build deep strategic partnerships with a broader base of customers is of paramount importance to us. And finally, we offer clients some of the best insurance technology in the marketplace, technology that helps reduce expenses, improve accuracy, and increase customer satisfaction. Technology will only continue to increase in its importance in our industry, and we are well-positioned to benefit from this. Now, an overview of the quarter. As we discussed on last quarter's call, our results this quarter reflect the trend of reduced catastrophic weather activity, presenting a challenging comparison year over year.

The first quarter of 2023 included significant revenues and improved profits with the wrap-up of claims from catastrophic events including Hurricane Ian, Winter Storm Elliott, historic floods in Australia, and severe winter freezes in the U.K. and the U.S. It is important to note that while our weather-dependent business was down for the quarter, our non-weather-dependent business performed very well, reflecting the health of our diversified business model. Our first quarter consolidated revenue declined year-over-year to $301.7 million, with operating earnings of $12.1 million reflecting the absence of meaningful catastrophe events. It is part of our long-term growth strategy to keep our catastrophe teams well-staffed regardless of short-term weather fluctuations. This allows us to effectively serve our clients in times of unprecedented need.

Highlights of the quarter included continued strong performances from our Broadspire segment and the U.S. GTS service line, both of which achieved record quarterly revenues reflecting our strong client relationships and new business wins. I'm optimistic about their continuing strong performance as we move through 2024. We added a total of $24 million in new and enhanced business this quarter, a testament to our focus on expanding our customer base and deepening our relationships with the existing customers. Our balance sheet remains robust, with strong liquidity providing the capacity for potential future acquisitions. On the chart on the left, we broke out our weather-related and non-weather-related business to help you better understand the dynamics in the quarter. Weather-related business on the chart, which includes U.S. CAT, U.S. Loss Adjusting, and Australia, decreased approximately 30%.

As you can see in the middle chart, a particularly large contributor to this decrease was our Networks business, which generates revenues from claims management services frequently tied to storm activity. Our Networks service line saw a revenue decline of 79% this quarter, directly related to reduced weather-related claims, illustrating the magnitude of this weather impact. Networks accounted for 2.6% of our consolidated 2024 first quarter revenue as compared to 11.8% in the prior year period. Another indicator of the reduced storm activity is the recently published Aon data, which shows a 43% decrease in global insured losses in the quarter and is profiled on the chart on the right. Finally, large carriers have also shared similar weather-related claims trends this quarter.

It is very important to point out that our non-weather-related revenue grew approximately 8% during the quarter, driven primarily by growth in Broadspire and International, our two largest segments, and reflecting the strength of our diverse business model. Weather will always fluctuate, but the team is doing a good job in all weather cycles while keeping our catastrophe teams well-staffed and driving performance in our non-weather-related business. We continue to allocate capital thoughtfully and with discipline. It is our strategy to seek opportunities that broaden our capabilities for clients and drive our growing market share, which includes investing in our proprietary innovative technologies. Our leverage ratio remains low at 2.06 times EBITDA. There is some seasonality in our business, and we expect to return to a leverage ratio below two times as we progress through 2024.

In the first quarter of 2024, we continue to return capital to shareholders with a quarterly dividend of $0.07 for CRDA and CRDB. As a reminder, our business is comprised of four segments. North America Loss Adjusting encompasses primarily our loss-adjusting business in the U.S. and Canada and reported 26% of our first quarter 2024 revenues. Our international business is comprised of all reported service lines outside of North America and contributed 32% of revenues. Broadspire is a third-party administration business in the U.S. and accounts for 31% of our annual revenues, and Platform Solutions, which includes Contractor Connection and our Networks and Subrogation businesses, contributed 11%. Now let's go on to the segments. Beginning with North America Loss Adjusting, in the first quarter of 2024, our revenues were $77.4 million, flat with the prior year quarter. Operating earnings were $4.5 million, and our margin was 5.8%.

We saw some margin erosion in this segment this quarter, reflecting investments in personnel and technology as we prepare for the 2024 storm season and the anticipated increasing demand for our services. Notably, this was a record quarter for GTS revenues, with continued growth in top carrier accounts. International Operations revenue for the first quarter of 2024 was $98.1 million, and operating earnings were $1.7 million. Our revenues grew 7% from the first quarter of 2023, or 6% when measured in constant currency. As discussed, operating earnings decreased year over year due to relatively high margin catastrophe revenue in the first quarter of 2023 associated with 2022 Australian floods, as well as some investments in technology. Our strategic efforts to improve our international performance continue to drive results, and this quarter we saw revenue growth in the U.K., Europe, and Latin America.

We expect this positive momentum to continue driving results with our international segment and anticipate margin improvement in the future quarters. Broadspire achieved a new quarterly revenue record of $94.3 million in the first quarter of 2024. Operating earnings were $12.8 million for the quarter, with operating margin expansion of 420 basis points. Additionally, medical management services and claims management both showed strong growth of 12% in the quarter. We retained 97% of our business year to date. Platform Solutions' first quarter revenue decreased by 49% compared with the first quarter of 2023, primarily attributed to anticipated softness in our Networks business. This was due to reduced catastrophe claims reflecting low U.S. severe storm activity for the last couple of quarters. Our non-weather business and the Platform Solutions demonstrated continued growth, with Subrogation revenue increasing 18% compared to the first quarter.

With that, let me turn the call over to Bruce for a deeper look at our financial performance.

Bruce Swain (CFO)

Thank you, Rohit. Looking at the first quarter of 2024, company-wide revenues before reimbursements decreased 5% to $301.7 million. Foreign exchange rates increased revenues before reimbursements by $1 million, or 0.3%. In the first quarter of 2024, selling, general, and administrative expenses increased $10.6 million, or 15.5%, compared to the prior year period. The increase was primarily due to professional fees, IT costs, bad debt expense, and compensation expense, including taxes and benefits, as well as investments in sales and marketing. GAAP net income attributable to shareholders totaled $2.8 million, compared to net income of $10.7 million in the same period of 2023. GAAP diluted EPS in the 2024 first quarter was $0.06 for both CRDA and CRDB, compared to $0.22 for both share classes in the 2023 period.

On a non-GAAP basis, diluted EPS was $0.13 for both CRDA and CRDB, compared to $0.28 for both share classes in the prior year period. The company's non-GAAP operating earnings totaled $12.1 million in the 2024 first quarter, or 4% of revenues, compared to $24.9 million, or 7.9% of revenues in the prior year period. Consolidated adjusted EBITDA was $20.6 million in the 2024 first quarter, or 6.8% of revenues, compared to $32.8 million, or 10.4% of revenues in the 2023 quarter. I'll now review the first quarter performance for each of our segments. North America Loss Adjusting revenues totaled $77.4 million in the 2024 first quarter, decreasing slightly from $77.6 million reported in last year's quarter. The segment reported operating earnings of $4.5 million in the quarter, decreasing from $8.1 million reported in last year's quarter due to milder weather activity.

The operating margin was 5.8% in the 2024 first quarter, compared to 10.4% in the 2023 quarter. International Operations revenues totaled $98.1 million in the 2024 first quarter, up 6.8% from the $91.9 million reported in last year's quarter. The impact of foreign exchange was immaterial. The segment reported operating earnings of $1.7 million in the 2024 first quarter, decreasing from $3 million reported in last year's quarter. The operating margin was 1.7% in the current quarter, compared to 3.3% in the 2023 quarter. Broadspire revenues were a new quarterly record of $94.3 million in the 2024 first quarter, increasing 12.2% from $84.1 million in the 2023 period, driven primarily by new business development, pricing improvements, and increased medical management usage. Broadspire operating earnings were $12.8 million in the 2024 quarter, compared to last year's first quarter operating earnings of $7.9 million.

The operating margin in this segment was a company-leading 13.6% in the quarter, improving from 9.4% in the 2023 period. Revenues for Platform Solutions were $31.9 million in the 2024 first quarter, decreasing from $62.8 million in the prior year quarter. The decrease was expected and is largely attributed to a reduction in Networks revenues as a result of lower CAT activity in the quarter, as we were completing Hurricane Ian claims in the prior year period. Operating earnings in Platform Solutions totaled $1.1 million, or 3.5% of segment revenues in the 2024 quarter, compared to operating earnings of $10 million, or 15.9% of revenues in the prior year quarter. Corporate unallocated costs were $8 million in the 2024 first quarter, compared to corporate costs of $4.1 million in the same period of 2023. The increase was primarily due to increased professional fees, compensation-related costs, and other reserves.

During the 2024 first quarter, non-service pension costs were $2.5 million, compared to $2.2 million in the 2023 period. We recognized a pre-tax contingent earnout expense of $200,000 in both the 2024 and 2023 first quarters. During the first quarter of 2024, the company did not repurchase any shares of CRDA but did repurchase approximately 86,000 shares of CRDB at an average share cost of $8.56. As a reminder, approximately 1.4 million shares are eligible to be repurchased under our 2021 share repurchase authorization. The company's cash and cash equivalent position as of March 31, 2024, totaled $45.2 million, compared to $58.4 million at the 2023 year-end. Our total receivables were up $5.6 million from the 2023 year-end. The company's total debt outstanding as of March 31, 2024, totaled $230.2 million, up from $209.1 million as of December 31, 2023.

Net debt stood at $185 million as of March 31, 2024, while our U.S. pension liability was $23.4 million at the end of the first quarter, reflecting a funded ratio of 92.6%. We made no discretionary contributions to our U.S. Defined Benefit Pension Plan during the first quarter of 2024, and we do not intend to make contributions for the remainder of the year. Cash flow from operations for the 2024 first quarter was a use of $19.8 million, with free cash flow of negative $29.4 million. This compares to cash used in operating activities last year of $445,000 and negative free cash flow of $9.1 million. This was due to lower operating earnings and higher incentive compensation payments in the 2024 period. With that, I'll turn the call back over to Rohit for concluding remarks.

Rohit Verma (CEO)

Thank you, Bruce. In conclusion, this quarter came in largely where we expected. Our non-weather-related business performed very well, and our business is well-positioned to service clients when increased storm activity inevitably returns. Our balance sheet remains strong, and I'm quite optimistic about the prospects for continued improved financial performance looking forward. Thank you for your time today. Operator, please open the call for questions.

Operator (participant)

Thank you. At this time, if you'd like to ask a question, please press star one on your telephone keypad. To withdraw your question, please press star two. If you're using a speakerphone, please pick up the handset before asking your question. We'll pause for just a moment to compile the Q&A roster. The first question comes from Mark Hughes with Truist. Please go ahead.

Mark Hughes (Managing Director)

Yeah, thank you. Good morning. The U.S. GTS suggested it had a good performance in the quarter. Could you talk about that? What's driving the upside there?

Rohit Verma (CEO)

Yeah. Hi, Mark. How are you? Mark, U.S. GTS has been performing really well, not just this quarter but for several years. This quarter certainly was another breakout performance. As you know, we have been investing, and we had talked about adding experts, and we had a target of adding 200 experts by the end of 2023, and we met that target in Q1 of 2023. Adding these experts has given us depth, has given us eminence in the industry, so we're seeing a lot of notable losses come to us, and that team has been hitting on all cylinders. So we feel very good about that business. We believe that that business has good long-term prospects. It's one of those businesses that doesn't get touched by AI or technology of any form from a disruption perspective.

That's the reason for the performance and the continued confidence in that business.

Mark Hughes (Managing Director)

Yeah, thank you. And then likewise, internationally, you said good momentum in the U.K. and Europe. It sounds like you're looking for margin improvement there. Is that new hires driving incremental volume? What's driving that?

Rohit Verma (CEO)

Yeah. If you recall, right around the end of 2022, we had started signaling that we were making some changes internationally. We had made some leadership changes. We had made some other sort of structural changes within international. We believe that those results are showing. We had also talked about diversifying in Europe from a client base, which was largely travel and entertainment, to a much broader client base. That is showing as well. We had made a couple of acquisitions in Netherlands, as an example. I think that is showing success. So we believe that there's good momentum internationally. We've made some investments in technology. We believe that that'll lead to efficiency. We are very closely looking at our pricing to make sure that if there's anything which is underpriced or mispriced, that that gets corrected, and that's what gives us the confidence on international as well.

I feel very good about the leadership team that we have in place in International now.

Mark Hughes (Managing Director)

Bruce, SG&A looks like some expense items up this quarter. How do you think that's going to play out the balance of the year?

Bruce Swain (CFO)

Yeah. Mark, we had some investment in SG&A, as I mentioned, with professional fees, some increase in IT costs, compensation-related costs, including investment in sales and marketing. I would say about $3 million of that increase in SG&A is kind of one-time for the quarter, and we wouldn't see that continuing as we go through the year.

Mark Hughes (Managing Director)

Very good. And then finally, in Broadspire, any observations about underlying claims? Looks like your overall volume is going up because of or helped by new customer wins, but I wonder whether in Workers' Comp, for instance, or any other lines, you see any notable inflection in underlying claims activity.

Rohit Verma (CEO)

Mark, I won't say that there is any—I mean, certainly, the claims are up since they were during the pandemic, right? There's no question about it. And we have seen, from a recovery standpoint, a full recovery of the claims frequency as well as a full recovery of what we saw as medical management cases. But I won't say that I'm seeing any kind of underlying secular increase in the frequency of claims in comp. I would say that most of our increases are coming from additional new business and additional economic activity as opposed to just pure increase in underlying claims.

Mark Hughes (Managing Director)

Understood. Thank you very much.

Rohit Verma (CEO)

Thanks, Mark.

Bruce Swain (CFO)

Thank you.

Operator (participant)

Thank you, Mark. Ladies and gentlemen, as a reminder, if you have any questions, please press Star 1. Your next question comes from Kevin Steinke with Barrington Research. Kevin, please go ahead.

Kevin Steinke (Equity Research Analyst)

Good morning.

Rohit Verma (CEO)

Hi, Kevin.

Kevin Steinke (Equity Research Analyst)

Mark, you had mentioned great. You had mentioned you reached the goal of adding 200 new GTS adjusters earlier in 2023, earlier, and then you had planned. Just wondering about the pace of hiring in that business now and if you continue to look to add there. And also maybe, given the growth in that business, I don't know if it's possible to provide just kind of a rough approximation of what percentage that business is of the overall North American loss adjusting segment.

Rohit Verma (CEO)

Sure. So look, I think I've shared this with you before, Kevin, that we're always in the market for expertise. We're an expertise-based business. Clients come to us because we have the expertise on our roster, so we will always continue to look for it. We haven't slowed the hiring down. We certainly had a target that we had shared with you all, so we thought compelled to make sure that we were reporting on it. We haven't slowed our hiring down. If we're finding experts, we're bringing them on, not just in the U.S. but elsewhere in the world as well. We've certainly had the most success in the U.S. but we're seeing replication of that success in other parts of the world as well in the service line. As far as North America loss adjusting is concerned, do you want to, Bruce?

Bruce Swain (CFO)

Yeah. I would say roughly a third. Yeah. Roughly a third. So think about Global Technical Services as a third, Canada as a third, and then our field operations business as another third. You'll see some variability there dependent upon weather and where that's occurring, but that's a general framework to use.

Kevin Steinke (Equity Research Analyst)

Okay. Great. Thanks. That's very helpful. So the $24 million of new and enhanced business in the quarter, should we think of that as fairly broad-based across the company, or does one area stand out? Just wondering about that in terms of the kind of.

Rohit Verma (CEO)

It's broad-based, but I would say the preponderance of that business is U.S.

Kevin Steinke (Equity Research Analyst)

Okay. I assume there's still good momentum in Broadspire as well with new business. Could you speak to that?

Rohit Verma (CEO)

Yeah. Look, I mean, I would say I feel good about all of our businesses, right? But as it specifically relates to financial results in 2024, I'm particularly bullish about Broadspire's continued momentum. And if I would say that I'm bullish about all our businesses, with the return of weather activity, you should see all of our businesses performing really, really well.

Kevin Steinke (Equity Research Analyst)

Okay. Great.

Bruce Swain (CFO)

Revenues are up 12% quarter-over-quarter.

Kevin Steinke (Equity Research Analyst)

Yeah. I know. That was a really nice result. Good to see that. So you didn't call it out on this call, but you talked about continuation of fairly benign weather. It looks like we'll still have a fairly difficult comparison in the second quarter here in the networks business. Is that the right way to think about it?

Rohit Verma (CEO)

Kevin, it's still early in the quarter, I would say. We often see a lot of activity in May and June of second quarter. Yeah. If we don't have any weather activity in May and June as well, it'll be a difficult comparison, but everything that we're reading and learning, that it should be a fairly active weather season. So that's where I'll leave it at. But if we don't have weather, then your assessment is accurate.

Kevin Steinke (Equity Research Analyst)

Okay. In May and June, we just usually think about more the convective storm activity.

Rohit Verma (CEO)

That's correct. That's correct.

Kevin Steinke (Equity Research Analyst)

Right. Okay. All right. You mentioned in your prepared remarks potential acquisitions. Just wondering what sort of opportunities you're seeing there, if there's an active pipeline, and how the market looks in terms of valuation for potential targets?

Rohit Verma (CEO)

Yeah. Kevin, I think we've always shared that we're always actively looking in the marketplace. Our pipeline is anywhere from 10-30 deep, depending on how things are going, but we are very discerning in terms of what we want to acquire and how we want to acquire. We're always looking, and that's the reason why we said that we have the financial flexibility to do it. If something aligns with us strategically and we believe the valuation is attractive, then we will. The valuations have come down slightly, but I think for quality assets, valuations still remain fairly high. Obviously, not at the same level as what you saw two years ago, but still fairly high.

Kevin Steinke (Equity Research Analyst)

Could you just remind us of particular areas you'd like to acquire? I guess it really comes down to capabilities and technology, adding some of those things that you might not have, but any thoughts on that?

Rohit Verma (CEO)

Yeah. We always look for we kind of put a lens, which has three different axes, if I can put it right. One axis is, does it give us capability in a geography that we already exist that we don't have? So as an example, what you saw with our acquisitions with Edjuster in Canada or with the acquisitions that we made in Netherlands, those were capabilities that we didn't have. Then we look for acquisitions where there's a geography that we believe has significant scale opportunities for us, but we just don't have scale or we are not there. So that was the acquisition that you saw from us as an example in Chile. And then the third and final, I would say, is where we need to establish some kind of a beachhead.

I would say that the capability one, the first one that I mentioned, the first dimension is probably where we're looking the most, right, where we want to have newer capabilities than have something purely for scale.

Kevin Steinke (Equity Research Analyst)

Okay. That makes sense. That's a helpful update. Thanks for taking the questions. I'll turn it back over.

Rohit Verma (CEO)

Thank you, Kevin. Thank you.

Operator (participant)

Thank you, Kevin. There are no further questions at this time. I will turn the call back to management for closing remarks.

Rohit Verma (CEO)

Thank you, Anush. Thank you to all our employees, clients, and shareholders for your continued commitment to Crawford & Company. Thank you, and God bless.

Operator (participant)

Thank you for participating in today's Crawford & Company Earnings Call. This call will be available for replay beginning at 11:30 A.M. EST today through 11:59 P.M. EST on June 2nd, 2024. The Earnings Call ID number for the replay is 309448 #. The number to dial in for the replay is 800.